Demographics May Be Destiny, but Mind the Assumptions

Demographic projections have become an essential tool of national, state and local governments, international agencies, and private businesses. The first step in planning for the future is to get a picture of what the terrain is going to look like when you get there. That’s mainly what I do for clients, audiences and subscribers, and demographics provide the frame (like assembling all the straight-edge pieces of a jigsaw puzzle first). But here’s the thing about projections: a small change at an inflection point, or the inclusion (or exclusion) of salient variables, can result in big changes to the future you are trying to describe. So like all treatments of the future, everything depends on the underlying assumptions, and the salience of the variables chosen for inclusion.

Demographics and Depression?
For example, a couple of recent essays on demographic trends start with different assumptions, consider different variables, and come to wildly divergent conclusions. David Goldman, associate editor at First Things, says the housing market has collapsed, and will remain in depression, because of the dearth of two-parent families with children.

Goldman asserts that only a a policy to restore the traditional family to a central position in American life can work to save the housing market. Without this, he says, ”we cannot expect to return to the kind of wealth accumulation that characterized the 1980s and 1990s.“

Goldman’s argument centers on the idea that the US housing market is driven by one variable: two-parent families with children. And since that variable has not been growing, neither can housing demand. Yet, obviously, other household types besides two-parent families with children desire, can afford, and live in detached houses. Indeed, 55.2% of all single-person households owned homes in 2007, up from 49% in 1990.

There is also a large population of empty-nest households (people who have already raised their kids), but who choose to continue to live in houses. Other demographic trends that will contribute to the continued preference for detached houses: increased longevity, better health, later childbearing, more home-based businesses, the presence of “delayed launch” kids (or those who boomerang to live at home before “final launch”), or a desire to have room for grandkids to visit. There is also the reality that many people will not want to move because of proximity of neighbors, churches, clubs and work.

One must also note that foreign immigration and domestic migration, even under lowest-variable projections, will still be substantial in coming decades, fueling housing demand.

In addition, other demographic trends suggest family and household formations will, once employment and income conditions improve, again provide a demand for houses. For example, there are more people entering their 20s now than in any time since the 1960s and early 1970s. True, we have just passed through a period of slow growth in family-age household formation, but once this Millennial generation start making money in an improving economy, they will start forming families and households, and will start buying houses.

The World’s New Numbers
Another recent essay on demographic projections starts with different assumptions, looks at different variables, and comes to different conclusions. Martin Walker, writing in The Wilson Quarterly, notes that something dramatic has happened to the world’s birthrates: they are up in developed countries, and down in developing countries (the opposite of what most dire forecasts project).

Walker starts by debunking the assumption that mass migration and low birthrates are transforming the ethnic, cultural and religious identity of Europe. He notes the decline of Muslim birthrates across the globe, and rising birth rates in Western Europe – albeit from very low levels – and consistently higher rates in the United States. He then explains that aging populations in Europe and the US will not place intolerable demands on governments’ pension and health systems, if we are willing and able to both raise the retirement age and increase the workforce participation rate.

These two steps (not easily achieved, but simple in conception) will result in a very manageable dependency ratio, similar to those of the 1960s, writes Walker. In the United States, the most onerous year for dependency was 1965, when there were 95 dependents for every 100 adults between the ages of 20 and 64 (“dependents” include people both younger and older than working age). By 2002, there were only 49 dependents for every 100 working-age Americans. By 2025 there are projected to be 80, still well below the peak of 1965. The difference is that while most dependents in the 1960s were young, most of the dependents of 2009 and beyond are older. But the point is that there is nothing outlandish about having almost as many dependents as working adults.

The assumption underlying this more favorable scenario is that given freedom and information, that is to say, given the choice, the continuum of progress and development is uniform and universal: people in all places and of all backgrounds desire middle-class lifestyles (which include single-family detached houses, by the way). And while the planet’s population is expected to grow by about one billion people by 2020, the global middle class will swell by as many as 1.8 billion, with a third of this number residing in China. The global economic recession will retard but not halt the expansion of the middle class.

The economic transition that development brings is accompanied by the demographic transition to lower birth and death rates (social, cultural and political transitions then occur too). Industrialization, urbanization, suburbanization: that is the pattern of how middle-classes grow. First-world countries have traversed this path, and now emerging countries are following.

Trends can and do change. In fact, it may even be said that every trend sows the seeds of its own reversal. But it has always been my goal to identify the constants across history, as a way to establish a baseline for evaluating the likelihood of future scenarios (again, the straight-edged pieces). I believe the “aspirational model” to be one of these constants.

Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends. Roger is economic analyst, North American representative and Principal for the US Consumer Demand Index, a monthly survey of American households’ buying intentions.